Yield to Maturity.
In plain English
Yield to maturity (YTM) is the single annual percentage return you would earn on a bond if you hold it from today all the way to its maturity date and reinvest every interest payment along the way. It folds together three things: the bond's regular interest payments, plus any gain if you bought below face value, or loss if you bought above it. YTM is more complete than the coupon rate, because it accounts for the price you actually paid, not just the bond's stated interest. When a bond trades below its face value, its YTM is higher than its coupon rate; when it trades above face value, YTM is lower.
01Why it matters
YTM lets you compare two bonds fairly even when they have different prices and coupons, so you can see which one actually pays you more. It is the number that answers what will this bond really earn me if I hold it to the end.
02The math, step by step
A bond has a $1,000 face value and pays $50 a year in interest (a 5 percent coupon). If you can buy it for only $950 because rates rose, you collect the $50 each year plus a $50 gain at maturity, so your yield to maturity is above 5 percent. If instead you paid $1,050, your YTM would be below 5 percent because that extra $50 erodes your return. The exact YTM requires a financial calculator or spreadsheet to solve.
03What this is NOT
The coupon rate is fixed and based only on the bond's face value. Yield to maturity reflects what you actually paid and whether you will gain or lose at maturity, so the two match only when you buy a bond exactly at face value.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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